Real Estate Challenges in the Playing Field

source: forbes.com

http://www.forbes.com/2008/11/25/world-housing-credit-forbeslife-cx_mw_1124realestate.html?partner=alerts

Housing

World’s Top Real Estate Challenges

Matt Woolsey, 11.25.08, 12:00 PM EST

As the global economy limps into 2009, barometers for the real estate industry are bleak.

 

In Pictures: World’s Top Real Estate Challenges

The sun isn’t shining for homeowners in Malaga, on the Costa del Sol.

Foreign buyers have stopped purchasing homes site unseen. Vacation home-seeking Spaniards, heeding the government’s warnings about a recession, have also pulled back. That leaves 54,000 vacant and unsold new properties throughout Malaga province, according to the Spanish Ministry of Housing. That’s 34,000 more than in all of boom-bust capital Phoenix, Ariz., based on Trulia.com figures pulled from Arizona’s multiple listing services, despite Phoenix’s 200,000 person larger population base.

 

What’s more, 93% of Spanish mortgages are of variable rate, according to the European Mortgage Federation, thus pegging them to the growing Euribor rate. In 2003, that dipped to 1.94%; it’s now 4.27%.

It’s a similar story across the pond. In Florida, year-over-year prices are down 20% in Orlando, 17% in Miami and 20% in Tampa, according to the National Association of Realtors.

As the real estate industry limps into 2009, such barometers are expected to remain bleak. To illustrate, Forbes.com assembled a series of snapshots of global real estate markets.

In some places, like the Baltic states, recent overbuilding is leading to softening. In Dubai, the slowdown stems from concerns about a declining oil market and in Spain and Florida, massive mortgage bubbles are driving down prices and upping defaults.

Of course, spots under sunny skies and sandy beaches aren’t the only ones suffering. Since the U.K. property market’s apex in March 2008, prices are down 13.4%, according to Knight Frank, a London-based real estate firm. Its head of residential research, Liam Bailey expects that in 2009, “U.K. residential prices will fall 30% from their peak, taking values back to September 2003 levels.”

Many economists believe the bottom has yet to arrive. For that, they are looking to the 2003 level, which is the technical point at which price booms began around the world.

But even that can’t be trusted.

“The problem with this technical approach to finding the bottom of the housing market is that it ignores both demand and supply-side realities,” says Anthony Sanders, finance professor at Arizona State University. “The technical bottom of 2003 prices ignores the fact that the composition of the housing market has fundamentally changed.”

In markets not overwhelmed with new housing inventory, macroeconomic concerns loom large. The credit crisis, combined with the price of oil falling below $60, less than half of what it was six months ago, has shuttered 60% of Gulf construction projects, according to Sakana Holistic Housing Solutions, a Bahrain lender.

Those global credit issues had many of the participants at November’s NYU Schack Institute of Real Estate’s capital markets conference in New York looking at 2009 as a year of few transactions. Even those with cash on hand, like opportunity funds looking to pick up distressed assets, are unlikely to buy up properties–a needed element to correct current overblown inventory–because existing mortgage products are being offered at considerable discounts.

“Nobody is going to buy buildings when they can buy first mortgages or second mortgages with 19 or 15% returns,” says D. Kenneth Patton, professor at NYU’s Schack Institute.

When transactions for buildings instead of mortgages return to favor, look for deals to take place in the U.S. This is because many investors see the American market as a good long-term play.

“Foreign investors have always targeted the major U.S. cities as being one of the best places to invest,” says Richard Kessler, chief operating officer of Benenson Capital Partners, a New York real estate fund. “I think when they come back into the market, they’ll come back into those marketplaces; the New Yorks, L.A.’s and San Frans.”

Until that point, however, expect another painful year around the globe.

 

In Depth: World’s Top Real Estate Challenges

 

• California ~ The Golden state has recently become a hot spot for residential real estate transactions. Based on figures from Radar Logic, a New York-based derivatives data firm, Sacramento, San Diego, Los Angeles and San Francisco lead the nation in real estate transaction growth, with Sacramento sales up an astounding 75% from last year. It’s important to note, though, that many of those sales are of foreclosed properties or by distressed sellers, who may have to sell at a loss. Sacramento prices are down 33% from last year, according to Radar Logic.
• United Kingdom ~ London, the U.K.’s biggest market, suffers from the same ills as New York. Because home sale prices in both are generally thought to remain immune from a downturn, price inflation rises in good times. In recessionary times, prices fall. Sales in the London market have declined steadily over the last year, based on figures from Knight Frank, and prices are down 13% from March. In the last month alone, the prime market of central London, which includes the city’s most affluent areas declined by 3.9%, a record according to Knight Frank.
• Continentall Europe ~ All eyes are on Spain’s impending price correction. According to the Spanish Ministry of Housing, prices rose by 250% from 1997 to 2005 while Spain’s population declined gradually. Behind it? Foreign investors and speculators taking on multiple properties, especially in Malaga, where there are now 54,000 vacant new homes. In Germany and France, prices didn’t accelerate at the same rates and haven’t significantly corrected. Though France is not officially in recession, Germany is, based on Eurostat estimates, and both are vulnerable to housing softening due to mounting unemployment.

 

© Dainis Derics/Shutterstock

 

• Southern U.S. ~ Florida’s overall housing market remains soft. Orlando prices are down 20% from last year, Miami prices have dropped by 17% and Tampa homes are commanding 20% less than a year ago, according to the National Association of Realtors (NAR). What’s more, transaction volume in Florida is at a standstill. Further north, once-solid markets like Charlotte, N.C., are beginning to feel the pinch–even if they’re not hammered with foreclosures. In Charlotte, prices have dropped by 4.2% in year-over-year terms according to the NAR.
• Eastern Europe ~ Emerging property markets here have been riding the wave of high growth. Slovakia’s economy, for example, expanded by 10% in 2007, while Bulgaria grew by 7%. Based on Knight Frank pricing data, the two housing markets grew by 32% and 31% respectively over the last year. But economic expansion is slowing, which will undoubtedly impact housing prices. In Latvia, housing prices rose by over 20% in 2007 but so far this year have dropped by 24%, according to Knight Frank.
• South America ~ Second home purchases were behind recent growth in the emerging economies of Argentina and Brazil. However, after years of growth in the materials and commodities markets, the Brazilian economy has slumped as exports have subsided driving down the value of the Brazilian real against other currencies. Even so, property buyers, spooked by a global economic downturn, have fled, according to luxury brokerages like Judice & Araujo in Rio de Janeiro.

 

© Celso Pupo Rodrigues/iStockphoto

 

• Africa ~ Prices–most notably Johannesburg and Cape Town in South Africa–are up 3.8% over the last year, according to Knight Frank. But that comes with its own set of problems. Based on figures from South Africa’s Bureau for Economic Research, core inflation is at almost 10%, which means that property values are not worth as much in real terms. To combat inflation in the broader economy, the South African central bank has increased interest rates six times since June, which constrains the availability of credit. This is bad news for the housing market.
• Eastern U.S. ~ Housing prices in the major cities on the Eastern seaboard have dropped. Based on National Association of Realtors (NAR) data, Boston prices have plummeted 10% in year-over-year terms, while transaction volume–a leading indicator of price movement–in New York City have declined by 19%, according to Radar Logic, a New York research firm. It’s a different story in secondary cities like Buffalo, N.Y., and Albany, N.Y., where prices have increased by 3% and 0.5% respectively, in year-over-year terms.
• Australia ~ Though Australia’s property markets don’t suffer from overexpansion, prices have dropped in Sydney by 3% this year, according to Australia Property Monitors. The big challenge for Australia is whether a slowdown in global consumption will negatively affect its exports-based materials economy. Based on international standards, Australia’s interest rates are still high at 5.25% (the U.S. is 1%), though the government has hinted at cutting rates to encourage lending.
• China and Japan ~ Japan is famous for its inability to stoke consumer spending. The decade following the real estate crash of the 1980s saw 0% interest rates and still no spending. Currently, the Bank of Japan reduced its interest rate to 0.3% to encourage credit markets. Thus far, it hasn’t had an effect on reviving the Japanese property market, which is down 0.7% in year-over-year terms according to Knight Frank. In China, Hong Kong has fallen into recession, a bad sign for its property market in the next year. On the whole, mainland prices are up 9% in year-over-year terms, according to Knight Frank.